Sunday, June 24, 2007

Barron's Summary (BX, AOB, YHOO, CROX)

Barron’s cover discusses Blackstone Group (BX), saying that just as Google changed the rules of the game in Internet search and dealt a blow to newspapers and other traditional media, the Blackstone is reshaping the corporate landscape and helping to fuel a global bull mkt in stocks through its appetite for LBOs. But it is unlikely to see its shares quintuple in coming years, as Google famously did. To the contrary, Blackstone may well disappoint investors and its IPO may signal the absolute top of the buyout boom. By almost any financial yardstick, Blackstone looks richly valued relative to other asset managers, especially at a time when rising interest rates and burgeoning competition threaten to make the buyout business tougher. As Wall St. veteran Seth Klarman of Baupost Group wrote in a letter to investors about the surge in alternative assets, private-equity included: "There are no magic investments that make money for you no matter what you pay for them. The more you pay, the less the return; the greater the competition, the less the inefficiency."

Fund manager picks include CFC, LUM and CNX.

If the subprime-mortgage market worsens, MBIA (MBI) could sustain claims losses exceeding a half-billion bucks. It might have to issue more stock, diluting shareholders.

The recent weakness in State Street (STT) stock offers a chance to buy cheap shares in a major beneficiary of expanded global securities markets. The upside is more than 20%.

At 46, Crocs (CROX) shares are priced for near-perfect execution. If the company trips, they could drop into the mid-30s, more in line with other footwear concerns. Take profits.

Salesforce.com (CRM) shares look pricey after rising threefold in three years. And now that the small company is competing with behemoth Oracle, taking profits is sensible.

“The Trader” section highlights DJO (DJO), whose shares took a beating in May after DJO reported its 2nd earnings miss in a row. The pullback was treated as a buying opportunity by some hedge funds, like Millbrook Capital Mgmt, which has accumulated a 9.4% stake. Millbrook is seeking regulatory clearance to buy more shares. The injury-care business is recession-proof, and DJO boasts gross margins near 60%. DJO's earnings flub also was caused by glitches, like $2m in cost overruns, as it struggled to absorb a recent acquisition of Aircast. Canaccord Adams analyst William Plovanic expects DJO to earn $2 a share in ’08. With mid-cap medical-technology co’s trading at an avg 23.7x ‘08 earnings, DJO's 20.7 multiple manages to look reasonable. He expects strong cash flow to help DJO pare debt and grow EPS "well in excess of revs for at least the next 3-4 years." Millbrook sees shares trading near 60 within 1-2 years.

“The Trader” also highlights Diebold (DBD) and NCR (NCR), whose shares are up 32% and 50% over the year, respectively. In N-America the financial self-service mkt is expected to grow by just 3-5% a year. Yet in less saturated mkts, like China, India and E-Europe, the growth rate exceeds 10% as banks jockey for the early-mover edge in the nascent self-service banking mkt. The shift toward higher-margin managed services also should generate more cash flow. Jefferies analyst Yvonne Varano expects "improving demand for ATMs, and cost savings to drive double-digit earnings growth in the coming years." NCR is trading at about 16.4x forward earnings, while Diebold sports a 17.6x. Both valuations are reasonable, and within their historical range - and may prove modest, if demand for automated transactions surpasses the Street's moderate ests.

“International Trader” highlights American Oriental Bioengineering (AOB), which is set to sell 13m shares in a secondary offering. CEO Shujun Liu will sell another 2m shares. For such a small co, there are a lot of big questions, along with a history of muddled disclosures and misleading claims. First, customers of the co aren't looking very closely at two key product lines, packaging for both carry misleading claims. The "UrinStopper Patch" package says it contains "radioactive photons" that "warm the acupoints." But Chemir Analytical Services says it detected no radioactive elements. Meanwhile, packaging for SoyPeptide powder says it has "patent technology from University of California, Berkeley." But an official at a UC Berkeley's Office of Technology Licensing says, "They are not one of our licensees." Secondly, the co’s history includes penny stock fraudsters and persons that are barred from the banking and brokerage industries.

“Follow Up” out positively on Yahoo (YHOO), saying that for all the uncertainties Yahoo faces, its stock is almost sure to rise. "Any way you look at it, the stock goes up from here," says Larry Haverty of Gabelli Global Multimedia. "It is very good value." Haverty sees Yahoo shares fetching in the upper 30s in a sale.

1 comment:

A lot of time is spent on the alpha versus beta debate but little consideration is given to another equally important but often ignored greek letter - rho or the sensitivity to changes in interest rates. Some San Diego business investors fund strategies have negative rho, that is depend on interest rates staying low. Ironically pension funds have positive rho as rising rates permit them to use a higher number to discount future liabilities. That can be a pyrrhic victory because on the asset side of the balance sheet their portfolios of stocks and bonds tend to fall in such times. It therefore makes sense for investors to diversify with OTHER strategies that tend to perform well in a RISING interest rate environment.